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Exception to Exclusion vs. Included Peril
Published in the January 2010 issue of Litigation Notes - View Article
The Supreme Court of British Columbia considers a “wear and tear” exclusion and finds that although a loss fell within an exception to the exclusion, it did not thereby become an “included peril”
A recent case from the B.C. Supreme Court looked to pre-contractual negotiations to determine whether damages caused by “wear and tear” of a refrigeration system was covered by a multi-peril subscription policy (“the Policy”). The plaintiffs (“Versacold”) operated a refrigerated warehouse that stored meat products belonging to Maple Leaf Foods Inc. (“Maple Leaf”). In May 2003, anhydrous ammonia, which is used in the refrigeration system in the warehouse, escaped from a pressure regulator valve and dripped onto the Maple Leaf meat products below. Maple Leaf made a claim for reimbursement as government food inspectors ultimately deemed the meat products unfit for Maple Leaf’s purposes. Versacold notified its insurers and filed the requisite proofs of loss. Versacold then paid Maple Leaf the entire amount of its claim for the value of the meat products and Versacold was subsequently able to sell some of the damaged stock at a salvage value. The defendant insurers, except Commonwealth, paid Versacold their proportionate shares of the amount claimed under the Policy, less the deductible and the amount recovered for salvage. Versacold brought an action against Commonwealth for its proportionate share under the Policy.
Section A of the Policy provided coverage for property of the insured, property of others for which they may be legally liable and property for which they have assumed liability. Section C of the Policy provided for “Warehouseman’s Legal Liability” which provided coverage for all sums which the Insured shall be become obligated to pay by reason of liability imposed by law for all damage to the property of others in the Insured’s care, custody or control for the purposes of the business of the Insured. Section D.1(a) of the Policy excluded perils, such as loss or damage described as “day-to-day wear and tear or gradual deterioration” but did not exclude any loss or damage resulting therefrom. Section D.1(f) excluded loss or damage caused by, inter alia, contamination, except where it is a result of a peril not otherwise excluded or where loss by an insured peril results therefrom. Section D(6) included a “refrigeration interruption and refrigerant contamination extension” which provided that the policy is extended to cover loss or damage to stock caused by the leakage or discharge of refrigerant from within a refrigerating system resulting in direct loss to stock, directly resulting from the occurrence of an insured peril.
After hearing expert evidence on the cause of the ammonia leak, the judge found that the cause was due to age of the valve. The first issue to be determined was whether the resulting damage or loss was an insured peril. Versacold conceded that it was not entitled to compensation for the value of objects that wear out or fail by reason of age or “wear and tear” (i.e.: cost of a new valve). Hhowever, it submitted that the losses resulting from such failures (i.e.: damage to warehouse property) were insured perils. Commonwealth argued that loss or damage to stock resulting from contact with ammonia was not compensable, unless the “contamination” was the direct result of an insured peril. It submitted that Section D.1(f) specifically excluded loss or damage caused by “contamination” unless it was the result of a peril not otherwise excluded. Since wear and tear and gradual deterioration were perils otherwise excluded by reason of Clause D.1(a), it submitted that loss arising from contamination of goods that results from wear and tear or gradual deterioration is therefore excluded. In essence, Versacold’s argument was that consequential loss resulting from wear and tear was expressly included in the policy and thereby becomes an “insured peril”; Commonwealth’s argument was that an exception to an exclusion is not the same as an included peril.
The judge held that the combined effect of the various clauses rendered the Policy ambiguous and that evidence of pre-contractual negotiations was allowed to come to an interpretation that reflected the true intent of the parties at the time the policy was made. On the evidence, the judge held that the parties had turned their minds to the specific point at issue and that Versacold had accepted Commonwealth’s interpretation of the contract when it made the policy, namely that it would not provide coverage for customer stock damaged by ammonia contamination from the refrigeration system that resulted from wear and tear. The court found that wear and tear was an excluded peril and while the resulting loss, was in effect, an exception to the exclusion, it does not become an “included peril” in the same sense as, for example, a fire. In that regard, during contract formation, Commonwealth’s underwriter had cited examples of included perils, such as when fire damages the building which results in ammonia leakage and subsequent product contamination, as the proximate cause of loss is fire, which is covered, and therefore subsequent contamination loss is covered.
The last issue to be resolved was whether Versacold was entitled to recover the amount paid to Maple Leaf under the Warehouseman’s Legal Liability provision. Versacold submitted that the Refrigeration Interruption and Refrigerant Contamination Extension applied because the loss to stock occurred as a result of an insured peril, namely Versacold’s negligence in the maintenance of the refrigeration system. The judge concluded that the evidence did not support a finding that Versacold was obligated to pay Maple Leaf by reason of liability imposed by law as there was no evidence that Versacold failed to meet an appropriate standard of care in its inspection or maintenance/replacement routines of the refrigeration system.
Versacold Corp. v. Zurich Insurance Co., 2010 BCSC 23.